Demography is destiny

The world is undergoing a dramatic transition due to the confluence of disruptive forces such as accelerating technological change and globalization. But another important factor that often gets overlooked will shape society and the global economy over the coming decades: The life expectancy of humans is increasing. Fertility rates are falling, and the world’s population is growing gray.

This unprecedented demographic shift has major implications for U.S. fiscal policy. Entitlement programs will be increasingly strapped as the number of beneficiaries increase and the number of working people who pay for the benefits shrinks.

Due to advances in medical science and technology, people – especially the well to do – expect to live longer, better lives than they might have imagined even three decades ago. According to the Census Bureau, the average American born today can expect to live to about 80, up dramatically from the average of 68 in 1950.

Additionally, the Census Bureau notes that whereas the average American woman in 1950 had 3.5 children during her lifetime, the figure today has fallen below two. The causes of declining fertility include the rising social status of women, widespread availability of birth control, and the growing cost of raising children.

French sociologist and philosopher Auguste Comte coined the aphorism “demography is destiny” with dubious finality almost 200 years ago. But that does not suggest that destiny is immutable, nor is it inevitable. Just as aging individuals must adjust their lifestyles to maintain personal vitality, societies with aging populations must adjust policies to preserve and promote their economic prosperity.

Demographic trends can have big implications. This shift from a predominantly young to predominantly older population has both broad macro-economic implications and important financial consequences. Consider that many U.S. entitlement programs were created with the assumption that there would be a relatively small group of old people and a large number of working-age people, followed by an even bigger cohort of children.

According to the Census Bureau, 47.8 million Americans are 65 and over. This figure is projected to nearly double to 83.7 million by 2050. Just 10 years ago, 12.5 percent of the population was 65 and over. Today, it is 15 percent, and is projected to reach 21 percent in just 20 years. By 2030, one in every five U.S. residents will be over 65. For decades this was the age when people were expected to end their careers and embrace a life of leisure, following Andrew Carnegie’s advice to spend the first third of life getting educated, the second third getting rich, and the last third giving money away.

As the baby boomer generation retires, fertility rates keep falling and life expectancy continues to increase, there will be too many beneficiaries and too few taxpayers. In 1950, the American economy had 8.1 people of working age for each person of retirement age. Recent figures indicate that this “dependency ratio” as the demographers call it, has shrunk to just over 5-1. By 2030, the Census folks estimate it will have fallen to 3-1.

Caring for large numbers of elderly people will put severe pressure on government finances. More specifically and painfully, the U.S. may be facing major tax increases, significant budget cuts, or most likely some combination of the two to secure the future stability of old age entitlement programs. In particular, Social Security and Medicare, which provides health insurance to the aged, will rise as a share of gross domestic product as baby boomers retire.

With the retirement of baby boomers and the rising number of elderly in the population, the nation will face a slow-motion train wreck absent changes in government fiscal policy. The good news is the slow motion part, which gives Americans enough time to take on the challenge of real entitlement reforms that will allow the country to successfully navigate this demographic transition.

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